Loyalty has to be a two way street; otherwise it is just bribery and that’s not sustainable.

How do you react when the head of a major airline loyalty program so bluntly states their case? More to the point, what do you say to the person wondering why they don’t get retention bonuses comparable to sign-up bonuses on an annual basis. Do you believe the programs when they say something like, "Every time we tweak [the benefits] we try to take off something that not many people are using and add something that we think more people will use."

Both the headline of this post and the above quote were offered up by Jeff Robertson, VP SkyMiles, during a session last week at the Executive Travel Summit outside DC. Robertson also offered insight as to why a less valued customer – one who doesn’t hit the spend requirements for Medallion status, for example – can suddenly become valuable enough to rate the status with $25,000 spend on a credit card. Unsurprisingly, it is because Delta will have made a lot of money based on that spend, pushing the customer past the value tipping point into being considered worth rewarding.

Throughout the five days I was at the sessions it was interesting to hear the different views of the parties involved. Sure, consumers want more and airlines want to give less. Airlines say the costs to provide the benefits are going up (as are airfares and load factors, so not too hard to believe). Customers say they want long-term loyalty to be rewarded, among other things. What was particularly interesting to me was hearing the view the credit card companies have on the topic.

Sure, the CC folks are incredibly biased. But that doesn’t mean the ideas they have cannot be solid. David Rabkin, SVP Consumer co-brands for American Express offered up a few views which seem pretty similar to the two-way street discussion, but which also have me wondering about which types of loyalty are the ones really worth rewarding. Using two different examples Rabkin quite clearly indicated that share of wallet is more valuable from a loyalty perspective than total revenue. In one instance it was a simple comment about credit card spending, "Someone who gives a high percentage of spend is loyal, even if it isn’t as much money as someone who spends a lot of money but across different cards…. The guy who only has a small wallet and gives you all of it is golden; give him all the rewards you can."

The second example offered up three hypothetical customers:

Very frequent domestic lowest-fare customer

Multiple long-haul F customer, but who also flies on competitors

Credit card user who pulls your co-branded card out thrice daily

Of these, Rabkin made the argument that #3 was the best customer for the airline in terms of loyalty. Or, as he stated in the session (slightly paraphrased):

We love that guy who is flying in the back of the plane but he’s not making us any money. We love the $10k fare but he’s not loyal. We have to focus on the guy who is bringing us the best revenue.

I certainly agree with rewarding the best revenue more than the other options, but I’m not nearly as convinced that share of spend matters so much as total volume. That’s not to say either is 100% important or not, but earning the majority of revenue from a customer based on 3rd-party transactions is a strange way to believe they’re loyal to me. At another session over the weekend there was some discussion of lesser-known loyalty programs and how some of them (BMI was the big name in this space previously) were shells which seemed to be associated with an airline but where the bulk of the points activity seemed to be wholly third party. There are a couple still out there today. What happens when the operations of the loyalty program become so completely disconnected from the operations of the airline? Is that a sustainable way to run the business? Sure, the airlines get to manufacture the award inventory on their own planes, but when partners get involved there are a lot of variables they don’t control, and that can be a challenge.

Ultimately, considering that 60% of points earning these days happens outside of flying (I thought the number would be higher) it isn’t all that hard to believe that Rabkin is correct in who the most valuable customer is. But does that make them the most loyal? And is that the loyalty to be rewarded?

And then there is the final theme which was pervasive throughout the sessions, "Miles are a relic of history. In the next 5 years, maybe 3, programs will be revenue based." That’s a direct quote from an industry insider and I think that the timeline is probably about right.

The industry is entering into a period of significant change in the coming years. There is significant pressure to reward the right types of loyalty, not just time on a plane and not just absolute spend. There will be moves to shore up programs, ensuring that they remain revenue positive for the airlines while also not losing too much in the competitive landscape. Then again, with less competition, that is much easier to do. It isn’t like there are any programs out there which are ridiculously generous across the board.

22 Responses

Thank you for your insight Seth. I think that loyalty should be a two-way street, hence why I’ve respected Air France’s method of redeeming First class tickets on their metal. I’m more of an old-school on this in that loyalty is based on flying a certain airline all the time and getting rewarded with the privilege to redeem a first class seat on that airline (as a way to say “thank you for your loyalty.”)

In Jamaica, we say “yu free paper bun,” which means basically, the airlines and the card companies have wised up and you have to spend proper money for them to reward you for loyalty.
I remember fliers who used to fly IAH to HOU enough times to gain status, Is that loyalty?
It also did not help that everyone and their mother publicized every loop hole in the programs. The card companies and the airlines and hotels watched and now they are reacting. It was bound to happen.

As much as all of us (myself included!) are going to hate the shift to revenue based frequent flyer programs, it DOES make sense and is more fair to directly tie elite qualification points and award points to how much one spends. What’s certainly not fair now is awarding the guy who is flying a last minute, short haul flight that costs, say, $800 1000 elite qualifying miles when someone else who got in on that $500 mileage run to Brazil is getting 8000 elite qualifying miles.

Thanks for the post, this is quite interesting. I think the loyalty/frequency programs will always be shifting in some manner, as this is still a soft science, no matter how much research data they have.

After all, in my mind it boils down in large part to emotional and psychological factors…airlines sure want customers to *feel* rewarded, which can mean different things for different folks. The guy who never checks a bag anyway, won’t care about waived baggage charges, for example.

For that matter, some of the benefits that people strive for in earning status or keeping a co-branded credit card , used to once be free for everyone (like a free checked bag)! That always sticks in my craw…though I suppose younger folks who never flew in those days aren’t as aware of that.

not worried. airlines get tons of revenue from miles blogs, credit card issuers like Chase and Amex. Stop miles and you will lose that free advertising. Secondly Chase and Amex buy millions of dollars in points directly from the airlines each year. It’s my guess that only 70-80% of those miles are ever redeemed meaning a 20-30% return right there. Their “revenue” butt in seats are one thing. But they get revenue from miles/points, don’t kid yourself. That side business is here for good.

I don’t disagree that the miles and points will never disappear. The answer, as it usually does, lies somewhere in the middle. The new generation of loyalty programs might benefit from being a hybrid of old and new: redemption is points-based with a sliding scale for the strength of your revenue-based loyalty. Rather than tier-based fare bucket availabilities, move to an any-seat model with varying point prices based on revenue.

Wow. Certainly a Byzantine kind of logic at work in ranking the value of customer loyalty. And the idea that if I spend 65K a year on my DL Amex Reserve and 35K on Chase Sapphire, that I am less valuable to Amex than someone who spends $15K on a DL Gold card but has no others, is patently absurd.

I am grudgingly coming around to revenue-based earn, especially. As I’ve come to see the way the system is gamed by the points and miles sharpies I’ve discovered that rather than being a savvy fellow flying on discount tickets and racking up card bonuses, that I’m a piker who has to fight for upgrades with folks who pay a fraction of what I pay for their loyalty.

But if they go to revenue based awards as well, then there’s no point in not switching to cash back cards. But don’t the credit card partners suffer in that sort of devaluation too?

I would love to know what the kickback is to Delta for the American Express co-brand.

Also, Rabkin doesn’t really consider the contingent benefit of the frequent coach flier. I was that flier at one point, and because Delta had treated me so well, both in terms of customer service and in terms of loyalty rewards, I stayed staunchly loyal to the airline. Eventually when I opened my own business and started to travel more, my wallet also grew, and all of a sudden purchasing first and business class fares was feasible. It was their treatment and service to me as a lowly Silver Medallion though that earned this long term loyalty. Delta will profit from this strategy, and it will reward their balance sheet for sure, but I think it is short sighted and not aligned with long term customer retention and passenger growth. I can no longer promote Delta and the Skymiles program as I used to.

I wonder on average, what percentage of flyers – or at least of the “big spenders” – are only loyal due to corporate contracts or other restrictions? Or aren’t free to choose their carrier on a personal basis? I guess the airlines may not care, but if I’m only flying Airline X because I am forced to by corporate, am I really loyal? I guess it doesn’t matter to the airline if they’re getting the revenue and have a deal with the company.

If Amex is true to its plan, I will get my kids a DL plat card and allow them to spend 1000$ a year on it as a student. 99% of their spend.
Maybe they will make them DM ! for their “loyalty” !!

As for me, I will earn a few 100k on the Chase UR and be a nobody with Amex despite spending 60k on a DR ?
I think not! If they believe that they are in for a shock.

Any system can be gamed.
The more transparent the working the better.
I have gone to the dAArk side and to UA – despite the new problems, the CO award engine actually works and is fine.
This is the booking engine interface that NW almost had and DL should have.
All partners are shown online and if 1 segment is in high, it shows the price for the trip in high instead of adding low + med + high for each segment and coming out with 2 MM miles for DC to LA!

Anyway as long as loyalty can not be relied upon by the consumer, forget about my loyalty to the company. Until they fix the awards system so that it is fair to me, it is stupid to stay with DL. Bye to DL, hello to UA/AA/US

If they go revenue, I’ll go to cash back cards. Credit card issuers will offer 100k signups like nothing, as 50000 pt saver level tickets for domestic flights would be here to stay. Just a joke with those FF program, I only fly jetblue if there price is only that good to forgo the other airlines.

I really am valuing my VX Gold status. Baggage, boarding, Main Cabin Select, etc. (Branson was at SJC today for the kick off of the new LAX-SJC route, by the way.)

In this case, the loyalty paradigm is working for me: I fly them, they treat me well. I have not redeemed a point yet with them…

My Fairmont status follows the same value equation. I frequent their hotels, they treat me well – on property ad with some room / upgrade / food certs. I have Fairmont points with the visa card, but honestly do not know how many points I have or how to redeem them.

I feel, by the way I am treated and the benefits that I get, that both of these companies value my business (loyalty?).

@Lark : exactly my point …. you stayed loyal to VX due to service, not the value of their FF program (the benefits you’ve listed for VX Gold are on par with pretty much all elites at the big 4 legacies so nothing extraordinary about them)

The whole point of loyalty is what value they could reward me after my original flight. If aspirational awards are unattainable, then they become boring cash back products. Ill once again switch back to being a pure kayaker (sans Spirit – I avoid that like the plague)

@ Jessica. You have it exactly right. I can stomach revenue based earning (right now it would even work in my favor), but revenue based burn would truly kill any “benefit” I see from these programs, and I seriously doubt we will see that anytime soon from the legacies. What would that look like? Lets see maybe 600,000 points for a round trip in C from US to China because a revenue ticket costs $6K? Hmmm … no thanks. The carrot of a front cabin award /upgrade is pretty much the only thing keeping me loyal. I can see myself completely exiting the FF prison and freelancing each trip on which ever carrier makes sense.

You may not want revenue-based redemption, but it is already here in several programs (VX, B6, WN in the USA, others globally) and it is growing. It is easier to explain to the passengers and for the sizable majority – those for whom domestic coach travel is the goal – the programs actually work very, very well. It doesn’t scale up to international premium cabin travel well but I think the airlines would be OK with that since most awards aren’t in that category.

To your point, Carl, the cash-back idea actually works for many consumers. They understand it and they know what the value of the points will be. That’s actually appealing to many. Not most of us, but to many. And, quite frankly, the “us” in this case is a collection of people the airlines can afford to piss off. There aren’t enough where shifting the business would matter so much and the other options aren’t all that much better so there isn’t really anywhere to go anyways.

@Lark: You’ve identified the difference between elite status perks and the value of the points in the programs. Different customers want different benefits for their spend/loyalty. Most of the elite benefits actually matter very little to me yet I still go for status because a couple of them do offer a bit of value. It really varies by customer.

My point is we can already earn somewhere between 1.25% to 2% cash back on credit cards. Good old cash that you can use to book any revenue ticket on any carrier or revenue room, and earn full elite benefits and points. The only reason to accept miles or points instead of cash is if they offer the potential of a substantially better reward. And it can work for the airline because of “breakage” as well as people who earn while thinking of an aspirational award, but who then redeem for something much less valuable. If they just convert it to revenue-based redemption, a cashback card is simpler and less onerous all around. Also less loyal, eh?

Yes, you can earn cash-back on a CC. And if you never fly other than on awards that’s no big deal. If you are earning points for flying and also on a CC, however, you’ll need to be able to combine them to extract the maximum value. Having $200 in airline credit and $200 in bank-card credit doesn’t help if you cannot combine them to book a $400 ticket.

If airline award pricing become revenue based, they’ll likely let you pay with a combination of points and cash. I think UA or DL have something like pay with points that values the miles at 1c each.

In any event, I’d expect that the infrequent flyer wouldn’t find airline cards very compelling any more. And the frequent flyer can still accumulate enough points/miles.

Seems to me that the allure of the airline programs and associated cards has been that the airline can provide otherwise-unsold premium cabins to the points earner. If it’s just a 2% rebate on purchased tickets, and you have pay for awards, the secret ingredient seems gone… unless you can travel via RGN or CMB

United does not have a formal pay with points program right now for most customers; there might be something associated with certain CCs but it is definitely not universal. Delta’s version also requires the credit card and has some other notable limits to the way in which it can be applied.

Any infrequent flyer who finds the airline CCs compelling today is probably doing it wrong already.

As for where you see the allure of the programs, I’m personally more or less in the same boat. But I don’t think that either of us is anywhere close to representing the average traveler, even the average relatively frequent flyer.